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TOKYO, Oct 13 (Reuters) The Nikkei average rose 1.02 percent on Friday to hit a five-month closing high after Seven&I Holdings Co.

Ltd. and others with solid earnings prospects rose, while Sony Corp.

climbed on a Morgan Stanley upgrade.

Retailers Daiei Inc. and Aeon Co. Ltd. advanced after Aeon said they plan a capital tie-up, while investors picked up trading houses such as Itochu Corp. on a news report about their robust earnings.

''There will be a flood of news reports about corporate earnings starting next week, confirming strong fundamentals,'' said Kenichi Azuma, an equity strategist at Cosmo Securities Co. Ltd. ''Investors are trying to get ahead of them now.'' The Nikkei rose 167.73 points to 16,536.54, the highest close since May 12. The Nikkei also booked its third straight weekly advance, edging up 0.61 percent. The broad TOPIX index rose 0.89 percent on Friday to 1,628.00.

The recent weakness of the yen and companies' conservative outlooks have left room for earnings upgrades, but profit expansion is slowing following the two-digit growth in the last four years and that might disappoint investors in the end, said Jun Nishizaki, chief portfolio manager at Nissay Asset Management.

According to Daiwa Institute of Research Ltd., 300 major companies on the Tokyo Stock Exchange's first section posted an average 12.7 percent rise in recurring profit in 2005/06. For this fiscal year the growth is expected to be 6.9 percent.

''We had a strong year last year and that will make growth look poor this time on a yearly basis,'' he said.

After the market closed, Sumitomo Mitsui Financial Group (SMFG) and trading house Sumitomo Corp. said they would integrate their leasing businesses and ahead of the merger, Sumitomo Corp.

will spend $1.62 billion to buy out affiliate Sumisho Lease Co.

through a tender offer.

RETAILERS BOUGHT Seven&I Holdings rose 2.7 percent to 3,880 yen after Japan's largest retail group reported a 12 percent rise in half-year profit and raised its full-year profit forecast.

Aeon climbed 3.6 percent to 2,760 yen and Daiei gained 3.7 percent to 1,955 yen.

Shares of Sony advanced 3.7 percent to 4,760 yen, adding to its 1.8 percent rise the previous session. Morgan Stanley raised its rating on the electronics conglomerate to ''overweight'' from ''equal weight'', saying it expected an earnings recovery, helped by sales of flat-panel televisions.

Sony shares have now recouped more than 80 percent of the losses they suffered after it launched a global replacement programme for PC batteries following a series of recalls late last month.

Similarly, Matsushita Electric Industrial Co. Ltd. gained 2.9 percent to 2,635 yen, extending its winning streak into a fourth session.

Gains in U.S. stocks helped some Japanese technology stocks, with chip testing equipment maker Advantest Corp surging 4.3 percent to 6,110 yen.

Trading firms gained ground after business daily Nihon Keizai said top Japanese trading firms are expected to book surges in first-half profit of 13 to 57 percent thanks to sharp rises in crude oil and other energy prices.

Itochu soared 4.5 percent to 922 yen and Mitsubishi Corp. gained 3.1 percent at 2,160 yen.

A notable loser was Fast Retailing, operator of the Uniqlo casual-wear chain, which fell 2.9 percent to 11,240 yen after Mizuho Securities downgraded its rating to ''3'' from ''2'' because the retailer's share price exceeded the brokerage's target price of 10,500 yen.

Elsewhere, Ain Pharmaciez Inc., Japan's largest chain of dispensing pharmacies, told Reuters it aims to take 10 percent of the nation's nascent generic drug market, and its generic drug wholesale unit is set to become one of its main pillars of business.

Trade was relatively active with 1.84 billion shares changing hands on the Tokyo exchange's first section. That was above the 90-day moving average of 1.66 billion shares shares. Advancing shares beat decliners by a ratio of more than six one.

REUTERS CS RN1338